City Assessor of Cebu City vs. Association of Benevola de Cebu, Inc.

A medical arts center housing a hospital's accredited doctors is classified as "special" real property entitled to a 10% assessment rate, not "commercial" subject to 35%, provided it is incidental and reasonably necessary to the hospital's operations and is not open to non-accredited physicians.

Respondent Association of Benevola de Cebu, Inc., a non-stock, non-profit organization, owns Chong Hua Hospital (CHH) in Cebu City. In the late 1990s, respondent constructed the CHH Medical Arts Center (CHHMAC), a five-storey building situated about 100 meters away from the main CHH building. An April 17, 1998 Certificate of Occupancy classified CHHMAC as "Commercial [Clinic]." Petitioner City Assessor assessed CHHMAC as "commercial" with a 35% assessment level, unlike CHH and its other separate buildings (Dietary and Records Departments), which were assessed as "special" at 10%.

• The Construction and Assessment: CHHMAC was constructed in the late 1990s to house doctors. The City Assessor classified it as "commercial" at a 35% assessment level based on a Certificate of Occupancy and actual inspection showing it was exclusively for lease to doctors, had no operating rooms or beds, and doctors earned income from patients.
• The Hospital's Operations: CHH is a tertiary hospital. To maintain this status, Department of Health Administrative Order No. 68-A requires it to be fully departmentalized and equipped with service capabilities to support certified medical specialists. Before CHHMAC was built, accredited doctors held clinics within the main CHH building. CHHMAC is only open to CHH-accredited doctors. Rentals charged are for recouping investment, covering lot rentals, and maintaining the building; any net income does not inure to private individuals but to charitable projects.

• Actual Use as Commercial: Petitioner argued that under Sec. 10 of Local Assessment Regulations No. 1-92, actual use dictates assessment. CHHMAC is exclusively for lease to doctors who earn income, making it principally used for profit and commercial purposes.
• Not Integral to Hospital: Petitioner maintained that CHHMAC is a separate building 100 meters away, not indispensable to CHH, which can function without it. It is not incidental or reasonably necessary like nurses' homes.
• Inapplicability of Abra Valley: Petitioner asserted that the Abra Valley ruling on incidental facilities applies to schools, and CHHMAC is not among the facilities mentioned therein.

• Integral Part of Hospital: Respondent countered that CHHMAC is actually, directly, and exclusively part of CHH, similarly situated to CHH's Dietary and Records Departments, which enjoy the 10% special assessment.
• Incidental and Reasonably Necessary: Respondent argued that though not strictly indispensable, CHHMAC is incidental and reasonably necessary to CHH's operations as a tertiary hospital, fulfilling DOH requirements for medical departments and ancillary services.
• Rentals Do Not Make It Commercial: Respondent maintained that rentals are a practical necessity to recoup costs and maintain the building, and taxes are paid on this income; net income does not inure to private benefit.

• Classification of CHHMAC: Whether CHHMAC is an essential or integral part of CHH and thus classified as "special" real property, or a separate commercial establishment subject to a 35% assessment level.

• Classification of CHHMAC: CHHMAC is an integral part of CHH and classified as "special" real property subject to a 10% assessment level. Because CHH is a tertiary hospital, DOH regulations require it to support certified medical specialists. The doctors in CHHMAC are CHH-accredited and perform essential medical services for CHH patients. Physical separation does not sever its integral nature. Charging rentals to accredited doctors does not equate to a commercial venture, as it is a practical necessity to cover costs, and net income does not inure to private benefit. Since CHHMAC is actually, directly, and exclusively used for hospital purposes under Sec. 216 of the Local Government Code, it is classified as "special."

• Incidental and Reasonably Necessary Doctrine (Appurtenant Property) — Property used exclusively for charitable purposes is not limited to property actually indispensable, but extends to facilities incidental to and reasonably necessary for the accomplishment of such purposes (e.g., medical arts centers for accredited doctors, nurses' homes). Physical detachment from the main building does not remove the property from this doctrine, provided the facility serves the institution's required operations.

• "Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is 'not limited to property actually indispensable' therefore, but extends to facilities which are 'incidental to and reasonably necessary for' the accomplishment of said purposes..." — Defines the scope of appurtenant property entitled to special assessment or tax exemption.
• "Conversely, it would have been different if CHHMAC was also open for non-accredited physicians, that is, any medical practitioner, for then respondent would be running a commercial building for lease only to doctors which would indeed subject the CHHMAC to the commercial level of 35% assessment." — Establishes the limiting principle that restricts the special classification to facilities used exclusively by the hospital's accredited personnel.

• Herrera v. Quezon City Board of Assessment Appeals, 3 SCRA 186 (1961) — Followed. Established that exemption for charitable/educational property extends to facilities incidental and reasonably necessary for the accomplishment of said purposes, not just indispensable ones.
• Abra Valley College, Inc. v. Aquino, 162 SCRA 106 (1988) — Followed. Applied the Herrera doctrine regarding appurtenant property to an educational institution.

• Sec. 215, Local Government Code (R.A. 7160) — Classifies real property for assessment purposes into residential, agricultural, commercial, industrial, mineral, timberland, or special. Applied to categorize CHHMAC correctly.
• Sec. 216, Local Government Code (R.A. 7160) — Classifies lands, buildings, and improvements actually, directly, and exclusively used for hospitals as "special." Applied to mandate the 10% assessment level for CHHMAC.
• Sec. 10, Local Assessment Regulations No. 1-92 (DOF) — Provides that actual use of real property is the basis of assessment. Cited by petitioner but found inapplicable to classify CHHMAC as commercial because its actual use is integral to hospital operations.
• Sec. 6.3, DOH Administrative Order No. 68-A, Series of 1989 — Defines a tertiary hospital as fully departmentalized and equipped with service capabilities needed to support certified medical specialists. Applied to prove CHHMAC is necessary for CHH to retain its tertiary status.

Leonardo A. Quisumbing (Chairperson), Antonio T. Carpio, Conchita Carpio Morales, Dante O. Tinga.